The risk the Reserve Bank isn’t watching

New figures suggest that the Reserve Bank may be raising interest rates too fast.

The bank has now raised rates at five of its six most recent monthly board meetings.

It has done that, primarily, to curb inflation.

It sees the threat of resurgent inflation arising from Australia’s emerging resources boom.

However there are other risks, too, which cannot be ignored  safely.  And new figures show that the bank’s board may not have been giving them sufficient weight.

The Bureau of Statistics is reporting, for example,  that the value of housing finance approved throughout Australia in February fell 3.4 per cent from the January level.

This drop, on seasonally adjusted figures,  followed steep falls, also,  in previous months.

The nation already has a severe shortage of housing.

“Australia faces a housing shortage of nearly 110,000 dwellings,” the Housing Industry Association’s chief economist, Harley Dale, says.

Dr Dale warns, too, that there is now “a clear risk” this problem will get worse.

He says that could happen, very quickly, if the present housing recovery runs out of steam in the months ahead.

There are special factors at work, here, too.  The scrapping of the Federal government’s First Home Owners’ Grant, back in December and planning delays are among them.

Economists tell us that prices are set, basically, by the interaction of supply and demand.

Property prices, have been strong in most Australian capitals, over recent months.

However, they don’t yet pose an immediate threat to inflation.

That could change, very quickly, though as population pressures rise.

Especially if the supply of new houses is artificially restricted by rising interest rates.

“Such an outcome would deliver avoidable upward pressure on rents and on existing home values,” Dr Dale warns.

The Reserve Bank is making no secret of its wish to see interest rates back at what it regards as “more normal” levels.

So there are still further rate rises ahead.

The kind of forecasting, that the Reserve Bank Board looks at, during those monthly meetings, is always tricky.

The US economist, J.K. Galbraith admitted that, when he famously said:”The only function of economic forecasting is to make astrology look respectable.”

Although he was joking, Professor Galbraith aptly illustrated the dilemma the Reserve Bank faces, right now.

That is if you look too closely at one wave, while surfing, you can easily be battered by another.